Shorting Oil, Hedging Tesla

[jhm]

How Far Can Oil Rally? Investors Wager on Surge Above $100

If these speculators are correct, then Tesla will look awesome in 2018. That is, imagine a scenario were oil is surging well above $100/b just as Tesla ramps up Model 3 production. This would be the last hurrah for oil.

They other possibility is that such speculation could be symptomatic of being at the top of a massive bull run on oil. If a speculator really believed in super-$100/b oil in several years, why not wait until this September to buy when seasonal demands has fallen off? Both oil price and implied volatility could be down in September, making these options much cheaper.

Or perhaps this speculator is just trying to hype the current market while this bear run has a little life left in it.

Not my money. We shall see.

 

[neroden]

As with TSLA, the oil market in the short run is driven by speculation, hedging, and trading by people who have extremely divergent views. There's a group who think prices will skyrocket and stay high forever, a group who think prices will drop through the floor forever, and various groups with more complicated views. The price swings in the short run are driven by how much money each of these groups are deploying in trading in any given week. Hence, very high volatility.

In the medium run, the prices are determined by actual supply, demand, and stockpiles, which is what I've been trying to project.

In the long run, the volume is determined by the availability and price of substitutes (electric cars!) and the cost of production (drilling/refining/transportation). The price is determined by the gap between these two.

 

[renim]

speculators make their money in volatility..Its in their nature to ratchet the price of oil higher.

I'm Australian, I watched very closely when iron ore price went from annual price changes to 'spot' pricing.
Both cases are market prices. look at behavior pre april 2010 and post april 2010

speculators enjoy the sliver of money that comes from holding the commodity futures as it rises, but the producer enjoys the rewards of the vast bulk of the high prices.

both producers and consumers like stable prices, speculators like volatile prices. Producer and speculator results high prices.

Oil has a further dynamic, since yr 2000, oil itself has become financialised, that is, a currency in itself.

 

[jhm]

The massive run from $27/b to $52/b seems to have stalled. Now oil is ducking below $48/b. Where it goes, I don't know. But API anticipates an unseasonal build in crude stocks. At 10:30 AM Eastern, the EIA should nail this down.

Regardless, stocks are massively built up over the last two years, and it will take as long to draw them down. How much weight the market puts on this massive overhang is a matter of sentiment. Do inflation hedgers need to hold lots of oil right now, or does the inventory overhang pretty much assure that energy driven inflation is a minor risk? Speculators who bought at $27/b have nearly doubled their money already. Do they really think oil can double to $100/b in a short timeframe? Meanwhile producers are cautiously returning to invest a bit in wells that can profit at $50/b prices. Producers and consumers can deal with $50/b, but speculators can't stand for the price to sit still.

So is it now time for sentiment to sour on crude?

 

[jhm]

speculators make their money in volatility..Its in their nature to ratchet the price of oil higher.

I'm Australian, I watched very closely when iron ore price went from annual price changes to 'spot' pricing.
Both cases are market prices. look at behavior pre april 2010 and post april 2010

speculators enjoy the sliver of money that comes from holding the commodity futures as it rises, but the producer enjoys the rewards of the vast bulk of the high prices.

both producers and consumers like stable prices, speculators like volatile prices. Producer and speculator results high prices.

Oil has a further dynamic, since yr 2000, oil itself has become financialised, that is, a currency in itself.

This is very good. Commodity financialization seems to pull ahead demand until it crashes. Low interest rates from central banks also facilitate asset bubbles. This relates to oil in at least two ways. Directly, the financialization of oil leans into a bubble. And indirectly, the over investment in other commodities drives demand for oil. Miners and other producers have consumed a lot of oil building up stockpiles. So when commodities crash, demand for oil crashes with it.

Curiously, in Columbia--I believe--copper miners have built up substantial solar assets to power mining. Now the price of copper is too low to use all that power and the utilities are oversupplied with solar power. They are giving away free electricity. So we see that even demand for solar power got pulled ahead at least locally. But consider what this situation means as the price of copper recovers. This miners will go back to work first in the copper industry because they have the lowest marginal cost of energy. Miners that still rely on diesel generators will have to wait until prices get even higher. So oil demand cannot recover as quickly as it used to. Moreover, the marginal cost of copper has little to do with the price of oil. The implication here is that as miners switch to solar as their primary energy source, we may see some decoupling of minerals and oil.

 

[jhm]

The EIA reports that commercial crude stocks are down 0.9Mb and total petroleum stocks are down 0.7Mb. So there is not a build like API anticipated. Even so, these weekly numbers are too noisy to really be meaningful. The build in crude over the last 52 weeks has been 63.6Mb. But last week this annual build was only 58.3Mb. This market is adrift.

 

[jhm]

Oil is continuing to fall for a sixth trading day in a row. It's now dropping below $47/b.

Anyone want to take a guess how low this will go before returning above $50/b? I'm thinking we could see $43/b again.

 

[TheTalkingMule]

Is this all based on the Fed? If US producers are the swing production, and US producers are highly leveraged operations, can't they continue up until the point where raised rates shut off their credit line?

 

[jhm]

The stunning growth of electric cars, in four charts

Some good stuff here. Specifically, to hit 2C climate change goal, the IEA estimates that the EV fleet needs to grow to 150M by 2030. From a base of 1.26M in 2015, this is just 37.5% annualized growth, and the IEA recognizes that we are on pace for this.

It is particularly good that IEA has identified this critical level of EV growth needed to achieve 2C. This pushes the agency to consider critically whether other energy forecasts are both consistent with 2C and with 150M EVs by 2030. Specifically, IEA forecasts of demand for oil do not seem consistent with either. For example, 150M EVs should offset some 6 mb/d of demand for oil. Moreover, this also implies about 40M EVs sold in 2030, enough to take out 1.6 mb/d of demand in one year. The IEA sees oil demand growing about 1.2 mb/d each year for the next 5 to 10 years. But combining these views should lead the IEA to conclude that peak oil demand should occur a few years before 2030. I have yet to hear the agency to make such a bold assertion. Perhaps they have not harmonized their analyses to recognize this or they are reluctant to go public with it. If demand for oil is to peak some time between 2025 and 2030, this has profound implications for both private and public investments in oil and gas. Investments in oil infrastructure like pipelines and refineries are not likely to pay off in a 10 to 15 year timeframe. Oil and gas exploration are not likely to pay off either. I do suspect that the IEA knows this, but is unwilling to connect the dots for the public at this moment.

So I'll take this as a sign that the IEA is intellectually close to seeing the decline of oil by 2030. When they advance this publicly, it will shake the markets or already be old news.

 

[renim]

Just entered China only values into the spreadsheet, and when I subtract China from Global, the spreadsheet breaks around 2019/2020. That is to say, around 2019/2020 China matches the ROW (US,JP,EU,KR,BRIC,ASEAN) combined in plugin vehicle production. Interestingly China never gets beyond 30% of world ICE vehicle sales (also 2019), despite basically duplicating world vehicle sales around 2037.

like any model, its all about the assumptions etc etc etc
but if steel and coal is any example, its not an unrealistic scenario, China to duplicate the worlds auto industry.

lots of take aways,
Tesla is somewhat irrelevant other than as inspiration for the Chinese. (millet and Teslaah)
Chinese plugin vehicle production will either refinancalize or eliminate world oil demand for personal transportation. (depending on Chinese success or failure) remember every year, China adds in new cars the equivalent of a mid European country's entire existing car fleet. The reality of China's car sales and oil demand, is why oil was able to ratchet up even though shale oil was simultaneously ramping.

 

[neroden]

So, the question for investors becomes, how will Tesla weather the oncoming storm of imported Chinese BEVs? (Also, what year will that storm hit?)

 

[renim]

So, the question for investors becomes, how will Tesla weather the oncoming storm of imported Chinese BEVs? (Also, what year will that storm hit?)

With Tesla making a play for SCTY, my optimism to answer that question has taken a massive dive.

snoke sums it up clearly, rescuing SCTY is sentimentalism

 

[TheTalkingMule]

Oil up very modestly and it's enough to drag the entire global Brexit market up today. So much for a decoupling.

 

[jhm]

Oil volatility looks pretty high. The up trend looks broken to me, but I make no claim to technical trading. Brexit and a strong dollar may be the current source of correlation in TSLA and crude.

The increase in natural gas, $2.9/mmbtu, up from below $2/mmbtu earlier this year, is welcome to solar investors. This can drive up the fuel cost on utility rates, which gives SolarCity a more compelling value proposition. If Tesla does acquire SolarCity, we could become more interested in the price of natural gas. With oil prices low enough to slow up oil E&P, natural gas supplies could tighten up. US coal consumption is up about 29% y/y as gas prices itself out of the power market. So not only do retail rates go up, but nasty coal emissions too. Solar becomes the clearer choice for clean air.

 

[jhm]

ExxonMobil Backs Carbon Tax For Climate Change | OilPrice.com

Wow, Exxon got the memo from Elon. This could be good for Tesla-SolarCity.

I do see this a mostly a play for natural gas. Exxon wants to throw coal under the bus and drive back and forth a few times. With gas prices climbing, it's losing market share to coal. About the only way to enjoy higher gas prices is to tax coal.

 

[adiggs]

I'm totally fine with the idea that Exxon's enlightened self-interest leads them to advocate for a revenue neutral carbon tax, under the theory that natural gas will thrive (relatively speaking) compared to coal. My general attitude is that I am indifferent to the reasons people use that bring them along to a more sustainable and renewable activity level.

And I really like your description @jhm, of throwing coal under the bus and driving back and forth a few times I'm going to use that - sometime, somewhere

 

[jhm]

I'm totally fine with the idea that Exxon's enlightened self-interest leads them to advocate for a revenue neutral carbon tax, under the theory that natural gas will thrive (relatively speaking) compared to coal. My general attitude is that I am indifferent to the reasons people use that bring them along to a more sustainable and renewable activity level.

And I really like your description @jhm, of throwing coal under the bus and driving back and forth a few times I'm going to use that - sometime, somewhere

You bet, and for added irony you could put a rolling coal smokestack on that bus.

 

[jhm]

Oil Is Still Heading to $10 a Barrel

Well this a bold prediction. I think Shilling's argument is a bit strained. I definitely do not see a further collapse in oil as bringing down the whole economy.

Even so, it seems that bearish sentiment in the oil market is re-emerging. Indeed, the market really has not balanced. It's supported merely on the belief that someday oil will be worth more than it is today. The market bottomed out at $26/b not because consumption caught up with supply, but because investors were willing to hoard cheap oil in storage. When investors lose this long-term bullishness, oil can certainly fall much further than $26/b. If oil does fall below $30 early next year, could this shake confidence in long-term price recovery? Traders can make alot of money just playing seasonal demand, but other investors just get burned. Meanwhile, we get closer to the phenomenon known as Model 3.

 

[neroden]

I follow just enough websites which do oil supply predictions to see the case for oil prices going back up. I think there's decent odds that there might be one more run-up before the final price crash. Probably not this year; maybe 2017. Come 2018, Model 3 starts really destroying the business.

 

[jhm]

I follow just enough websites which do oil supply predictions to see the case for oil prices going back up. I think there's decent odds that there might be one more run-up before the final price crash. Probably not this year; maybe 2017. Come 2018, Model 3 starts really destroying the business.

Yes, I think that is the dominant view within the oil investment world, excluding the anticipation of Model 3. But I am starting to read more concern about the 3.5 mb/d supply disruptions (tar sand fires, Nigeria, etc.) subsiding. So the oil FUD stream is seems to be swelling a bit. So what I am trying to read here is when oil investor confidence may start waning. I think this market is largely driven by sentiment.

I think there can be a scenario that is both bullish about summer 2017 and bearish about winter 2017. In the extremes we could see oil fall to $20 before rising to $80, all before the Model 3 arrives on the scene. We might call this the whipsaw scenario.

We might want to think about how Tesla's share price might be impacted under an oil whipsaw scenario.